To cut or not to cut the repo rate?

costs come down. As deposit rates also move down as a response to both repo and lending rates coming down, gains are, in effect, passed on to borrowers at the cost of savers.

- (The author is chief economist, Bank of Baroda. Views are personal)

The central bank researches showed there are limits to which lower interest rates can stimulate the growth process. Often an argument put forward going by the famous Taylor rule is that if growth is lower than potential and inflation is under control, lowering of rates help push up growth. This issue would have been addressed when the assertion was made.

The issue is that if the RBI lowers rates to, say 5.25%, will the cycle end at this point or will the same feeling echo before the next policy? This is because with substantial excess capacity in some sectors of the economy, actual growth will always be below potential and the justification for lowering rates can be endless.

It is in this context that the real repo rate is important. Presently, it can be said that inflation at 0.3% delivers a real rate of 5.2%. But this number is a pure statistical phenomenon and will increase post January. It is likely to cross 4% in Q4 and average 4-4.5% in FY27.